Tuesday, April 17, 2018

Soybean Tariffs to Boost State-Owned Companies?

China's big state-owned soybean importers will not be affected much by proposed 25-percent tariffs on U.S. soybeans, according to a Chinese Business Journal article posted on numerous web sites yesterday.

The article appears to be a propaganda piece portraying the possible tariffs as an opportunity to boost the role of state-owned enterprises in China's soybean industry and freeze out multinational grain traders. The lack of named sources and the journalist's stringing together of propaganda memes suggests the article is propaganda masquerading as news for investors.

The reporter notes that three of the top soybean importers are state-owned companies--COFCO, Beidahuang, and Sinograin.

The China Business Journal reporter, writing under an apparent pseudonym, quotes an unnamed employee of an unnamed state-owned enterprise who said that officials from unnamed "government departments" have been asking Chinese companies about their soybean import volume, how much they import from the United States, and what their plans are for purchasing this year.

"The tariffs will have an extremely small effect on us large companies," the state-owned company employee told the reporter, "Because U.S. soybeans are only one-third of our purchases."

"The effect of the soybean tariffs is not extremely large," the article repeated several times in various forms throughout the article.

According to the reporter, the U.S. futures price dropped 5.25 percent after China's proposed 25-percent tariff on U.S. soybeans was announced. "But our company is not affected much, because we hedged our soybean purchases," the employee explained.

An investment analyst told the reporter that Brazilian soybeans cannot replace U.S. soybeans if China imposes the tariffs. Brazilian soybean prices are rising as the market anticipates a rush of Chinese buyers to South America who will compete for a limited supply of beans. Brazil already exports more than half of its soybeans, and about three-fourths of those exports already go to China.

The article segues to another propaganda talking point: Brazilian and Chinese State-owned companies can link up to trade soybeans directly, bypassing "ABCD" multinational trading companies. The investment analyst says he went to Brazil where he found that Brazilian companies were eager to learn about matters like Chinese customs clearance, inspection and quarantine so they could export soybeans directly to China without selling through an ABCD intermediary.

A representative of a Brazilian state-owned company said he had come to China to make deals with Chinese state-owned companies for direct trade in soybeans.

The Brazilian said, "We have a small order from a Chinese state-owned company to test the water."

The reporter then moves on to the old complaint that imported soybeans are destroying the Chinese soybean processing industry by depressing prices.

The reporter learned from a multinational grain trading company that the market for domestic Chinese soybeans is very limited. In particular, he said there was virtually no market for soybean meal produced from domestic soybeans because the price is too high.

The article gloms on to the "quality" mantra circulated by officials this year to claim that the "low end" oil and meal products from crushing imported soybeans have little momentum from consumer demand as it shifts to high-end products. Premium products of domestic non-GMO soybeans have better prospects, the journalist suggests.

In fact, the opposite is true. Imported soybean volume grows faster than expected year after year. The Chinese government had to step in to buy extra domestic soybeans produced in northeast China this year because there was not enough demand.

Saturday, April 14, 2018

Food Security AND Quality Promised by China Grain Reserve

China's food security strategy will prioritize quality over pure volume of grain, according to the head of the country's new State Administration of Grain and Commodity Reserves. Authorities will vomit their huge store of sub-par grain reserves into the market, induce farmers to grow high-quality grains consumers want, create a network of labs to test the grains, build grain industry parks housing millers and traders who will profit from premium-priced products, and crack down on corrupt operators in the system.

The grain and commodity reserve administration created by China's recent government realignment was inaugurated April 4, 2018. It will be responsible for managing national strategic reserves of grain, cotton and sugar under the direction of the National Development and Reform Commission. The new bureau takes on responsibilities of the former State Administration of Grain, Ministries of Civil Affairs and Commerce, and National Energy Administration.

In a Peoples Daily interview Zhang Wufeng, the reserve bureau's director (previously communist party secretary of the State Administration of Grain that it replaces), gave assurances that the "food bowls of Chinese people must remain tightly in their own hands" but Zhang also prioritized accelerated disposal of excessive inventories of corn, rice and other commodities to reach "rational" levels as soon as possible.

Zhang observed conflicts arising from changes in Chinese society. On the production side, China has surpluses of some commodities (i.e. corn and rice, although he did not mention them) and deficits of others (soybeans, again not mentioned specifically). Zhang observed that Chinese consumers had transitioned from simply getting enough to eat to "eating well, eating healthy, eating with assurance, and eating with convenience," but he fretted that China lacks supplies of environmentally friendly and high quality foods.

Zhang promised to align the grain reserve system with market demand. He also said adjustment of China's crop mix and rotation of crops and land retirement are necessary. The reserve bureau has no responsibility for crop production, but he promised to scientifically set the minimum prices for wheat and rice, coordinate reserve procurement and sales, and pay more attention to the potential consumption (of what they procure?)

A "China quality grain project" (优质粮食工程) kicked off last October (by Zhang) is the grain reserve bureau's contribution to the national rural revitalization strategy, according to Zhang. This project aims to upgrade the quality of China's grain and edible oils by improving post-production services, establishing a national system of third-party grain-testing organizations, and revamping quality control guidelines for grains, flour, noodles, and edible oils by 2020. The Ministry of Finance allocated 5 billion yuan ($790 million) for the project in 2017. By implementing the "China good grain and oil action plan," Zhang promised to complete "the last kilometer" for quality grain and oils to reach the dining tables of each consumer’s family.

Zhang promised to transform China from a "big" grain-producing country to a "strong" grain-producing country by giving top attention to quality and creating value chains based on deriving profits from quality products. Model cities and counties, specialty industry parks, and leading backbone companies will be components of a modernized grain economy. Zhang pledged that food security will be maintained by coordinating "government and market, the current situation and long-term prospects, production regions and consuming regions, domestic and foreign, security and development."

Authorities will continue to intervene in markets through "macro control" using central government reserves as "ballast stones" and local reserves as "the first line of defense." Zhang promises to nurture state-owned enterprises--through mixed ownership--while supporting small and medium enterprises in the grain market. The reserve bureau will speed up development of a national electronic grain exchange platform and brokering grain trade between grain-producing provinces and grain-deficit provinces.

Finally, Zhang sends a message to corrupt granary operators by promising to demand grain "quality" and "honesty" from both government and industry through strict party governance, high standards for cadres, and concentrated action plans featuring "great investigation, quick correction, strict law enforcement" to root out "hidden risks." A hot line has been set up for the public to report malfeasance in the grain marketing and storage system.


Wednesday, April 11, 2018

Spring GMO Seed Crackdown in China

With spring planting approaching, Chinese provinces are cracking down on illegal trading, testing, and planting of genetically modified seeds.

A March notice issued by Heilongjiang authorities warned farmers not to buy illegal GMO seeds sold as "pest-resistant or weed-resistant," offered free testing for seeds they already have, and urged farmers to report any merchants selling illegal GMO seeds.

On March 29, Heilongjiang Province officials promised to go to fields with rapid-testing kits to check for genetically modified corn and soybeans.

On April 9, Shandong, another of the biggest agricultural provinces, announced its campaign to crack down on organizations doing research on GMO crops, trials, production, marketing, processing, and imports of genetically modified material.

The same day, Inner Mongolia officials said they will focus on illegal sale and falsely labeled GMO seeds for corn, rapeseed, soybeans, sunflowers, and potatoes.

China allows research organizations to experiment and conduct trials of genetically modified seeds as long as they are approved and reported to the Ministry of Agriculture and closely controlled and monitored. But no genetically modified grain or oilseed crops have been approved for commercial planting in China.

In February China's Ministry of Agriculture reported that they caught seven companies conducting trials of genetically modified corn that were either unreported or illegal during 2017. Da Bei Nong Ltd. Co (aka DBN) was caught growing 8 kinds of GMO corn in unreported intermediate trials on a test plot in Heilongjiang covering over an acre of land. (In 2016, a DBN executive pleaded guilty to stealing corn seeds from test plots in the United States and sending them back to China in popcorn jars.)  Another Beijing seed company was also caught growing 8 kinds of GMO corn on about 1.8 acres in Heilongjiang. Five other companies and a company associated with Jiangsu's Academy of Agricultural Sciences were caught growing small amounts of GMO corn ranging from 5 to 150 stalks in a seed-breeding area in Hainan Province. All the trials were suspended and material destroyed.

According to one article, the Ministry of Agriculture's report alarmed many Chinese consumers who worried that genetically modified corn is already in the country's food system.

The provincial crackdowns are probably intended to assure consumers that authorities are tightly regulating GMOs, as they have promised to do many times. However, the crackdowns also suggest that there are already significant quantities of illegal GMO seeds sold and planted in China.

Sunday, April 8, 2018

MOFCOM: Peoples Republic of Shoppers

The blizzard of tariffs and trade rhetoric is overshadowing China's "new concept" of opening its economy to give its consumers access to better quality products. China's Commerce Minister Zhong Shan finished off a March 11, 2018 press conference dominated by questions about trade conflicts with a discourse on how MOFCOM plans to push ahead with plans to "give city and rural people more abundant choices, much more convenient services, and a more comfortable experience" by upgrading shopping opportunities for Chinese consumers and giving them access to imported high quality products. 

The initiative to shift China's drivers of growth from investment and exports to consumer demand was introduced by Xi Jinping at the October 2017 "19th Party Congress." The idea has been dressed up with the awkward Maoist slogan "Change in the Main Social Contradictions," and propaganda organs have explained how meeting consumer demands for quality and comfort fit neatly into China's historical progress toward a communist society.

Minister Zhong explained that 400 million of China's 1.4 billion people have entered the "middle class," and the main problem ("contradiction") has shifted to satisfying peoples' desire for a better life [from the 1950s-era problem of developing industry and modernizing agriculture in a "backward" country, according to the Peoples Daily]. Zhong cited the estimated $200-billion of overseas shopping done by Chinese citizens as evidence that China's economy does not supply the high quality products its consumers want. "Foreign purchases reflect the insufficient supply of quality products in the country and their high price," Minister Zhong said.

MOFCOM will work on initiatives to innovate in product marketing and distribution, expand consumption, and increase effective supply in three areas of work.

First, establish domestic platforms for consumption. Pedestrian malls for shopping will be developed to make cities more livable and to serve as a "beautiful calling card" for cities. Community shopping networks of convenience stores, food markets and other outlets should provide a commercial network of daily shopping within 15 minutes of residences. In the countryside, a network of market towns with shops and services will be part of a makeover of the countryside. E-commerce will be greatly developed, with integration of "online" and "offline" commerce.

Second, promote consumption and reduce costs to consumers by broadening access to the market, reducing tariffs on imported cars and some daily consumer products, opening the market to telecommunications, medical, education, elderly care services.

Third, improve consumer confidence in products they buy through rectifications and consolidation of the Internet and rural markets and by establishing a traceability system for agricultural products.

Tariffs announced last week on items such as imported pork, cherries, apples, grapes, plums, cranberries, pistachios, almonds, and macadamia nuts go in the opposite direction by cutting off Chinese consumers from high quality products.

Sunday, April 1, 2018

China's Soybean Retaliation: No Good Options

Official China has been mum on its intent to strike back against U.S. soybeans in the trade war brewing between the two countries. While online commentators in China agree that soybeans are the logical target for retaliatory tariffs, several have concluded that the impact on Chinese buyers and consumers makes this an undesirable option.

Last week, former Minister of Finance Lou Jiwei recommended striking back first at American soybeans, then cars, then aircraft, in remarks at an economic forum in Zhejiang Province last week.

A more developed argument for targeting U.S. soybeans appeared in a March 30 Global Times column by Cheng Guoqiang, Professor at Tongji University in Shanghai and former long-time researcher/advisor on farm trade for the State Council's Development Research Center. Cheng advocates "necessary countermeasures" against U.S. soybeans in accord with WTO rules to "defend China's national interest," "defend the spirit of WTO," and to counter "protectionist" U.S. measures that "show contempt for the multilateral trading system."

Cheng argues that retaliation against soybeans will have the greatest impact since they are the no. 2 U.S. export to China, with 2017 sales valued at $14 billion. Soybeans account for 58% of U.S. agricultural exports to China and 11% of all U.S. exports to China. He points out that U.S. soybean farmers rely heavily on exports, with 44% of production exported and 62% of those exports going to China last year.

Cheng claims that soybeans are politically strategic because production is concentrated in Midwestern States that were critical to President Trump's victory in the 2016 election. Cheng thinks pressure from these agricultural states will bring Trump to the bargaining table.

As the northern hemisphere begins its planting season, Cheng claims that clamping down on U.S. soybeans could encourage farmers in the Black Sea region and other areas to plant more soybeans and reach their "suppressed" potential as soybean suppliers. He suggests that South American producers could also receive a "signal" to produce even more.

Several other essays on the topic appearing last week briefly recounted the same arguments for targeting soybeans and puzzled over why soybeans were not included in the initial list of U.S. products China has targeted for retaliation:
These commentaries drilled deeper into the data about soybean trade and production than Dr. Cheng did, and each arrived at conclusions like "The Intellectual's" statement: "China and American soybeans are inseparable" ["中国离不开美国大豆"].

Each commentator recounts the meteoric growth of China's soybean imports--from 300,000 metric tons in 1995 to 96 million metric tons (mmt) in 2017. Imports grew 14 percent during 2017. China now consumes nearly a third of the world's soybeans and produces only 4 percent. "The Intellectual" commented that, "Soybeans are indispensable to China." Chinese people cannot maintain their much-improved living standards without imported soybeans, he wrote. 

China imports an estimated 85 percent of the soybeans it consumes, according to the "striking back" authors."The Intellectual" explains that the extreme reliance on imports came about due to a strategic choice to focus limited land resources on producing high-yielding cereal grains. Wheat, corn and rice yield 3 times as much grain per acre as soybeans, "so soybeans had to be the victim" as China sought to meet food security targets, "The Intellectual" explained. 

With China's current soybean yield of 1.8 metric tons per hectare, it would need 53 million hectares of farmland to grow the 97 mmt of soybeans the country imported during 2017. China currently plants about 7 million hectares of soybeans and 35 million hectares of corn. China says it has 135 million hectares of cultivated land in total.  

China imports such a large share of the world's soybeans that there would be nowhere else for China to fill its soybean deficit if it stopped buying U.S. soybeans. Last year China's imports equaled 64 percent of the 151 mmt of soybeans traded in world markets. While China is the world's biggest buyer, it has little bargaining power because there are only two major supplying countries. The "striking back" authors reported that Brazil supplied 53 percent of China's soybean imports and the United States supplied 35 percent last year. Argentina is the third supplier with a 7 percent share. "Our country basically has to choose between importing from Brazil and the United States," the "striking back" authors commented. 

There is no other supplier that could fill China's deficit if U.S. soybeans were limited. China's growing demand has already prompted a huge increase in Brazilian production that has reduced reliance on the United States. Blogger Shi Hanbing argues that Brazil already supplies half of China's soybean imports and has reached its limit as a supplier. Moreover, he points to USDA reports that say both Brazil and Argentina are expected to have diminished soybean harvests this year, shrinking potential soybean supplies. 

In view of these facts, all three commentators conclude that the main impact of imposing a steep tariff on U.S. soybeans will be to increase the cost of soybeans to Chinese buyers. The commentators anticipate that the higher cost of soybeans will have a "chain reaction" passing on price increases to meat and vegetable oil in China, causing an increase in the CPI. 

The "striking back" authors recommend that China save retaliation against soybeans as its "ace card." Blogger Shi suggests that the Chinese population eat less meat and switch to eating salads. 

For now, China seems to have little recourse to retaliate against U.S. soybeans without hurting itself, perhaps as much as it hurts U.S. soybean growers. In the long run, this will surely prompt Chinese leaders to double down on their efforts to nurture new soybean suppliers in order to reduce China's reliance on two soybean suppliers. 

Ironically, a similar effort by Japan many years ago helped catalyze the emergence of China's top supplier. After a U.S. export embargo during the 1970s raised questions about its reliability as a supplier, soybean importer Japan looked to diversify its soybean supply by investing in Brazil--a minor soybean producer at the time. A lot of other events, R&D, and policies had to line up to make it happen, and it took decades, but Brazil has now emerged as the top soybean exporter in the 21st century. Brazil's massive supplies also are the chief reason for low soybean prices--the "unfair" phenomenon Chinese soybean commentators normally chatter about and blame on the United States.

Now Chinese government and agribusiness leaders will surely get busy trying to create the next Brazil somewhere in the world. 

Wednesday, March 28, 2018

China Subsidizes Buyers and Producers of Corn and Soybeans

Two of China's top grain-producing provinces announced subsidies for buyers of corn and soybeans layered on top of generous subsidies for growers. For some corn, it is possible that three different subsidies could amount to 38 percent of the farm price, and subsidies could add up to nearly half of the purchase price for soybeans.

On March 23, Heilongjiang and Jilin Provinces announced a subsidy for processing plants and feed mills that buy corn and soybeans harvested in the provinces during 2017. The subsidy for corn purchases is 100 yuan per metric ton purchased in Jilin Province and 150 yuan in Heilongjiang. The subsidy for soybeans purchased is a whopping 300 yuan/mt in both provinces.

The corn purchase subsidy is aimed at industrial processors that make starch and alcohol products from corn with at least 100,000 mt of annual capacity and feed mills with at least 50,000 mt of capacity. The soybean subsidy is aimed at companies that make food products from soybeans, such as tofu, soy flour, soy milk, dried tofu, pickled tofu, fermented bean curd, dried bean curd, extruded soy products, fermented soy products, soy-based protein supplements, bean products processing and 13 or more soybean food products like bean sprouts, bean paste, with capacity of 5000 mt or more.

The average purchase price of corn in Heilongjiang is about 1725 yuan/mt, so the 150-yuan corn purchase subsidy equals 8.7% of the purchase price in that province.

The average purchase price of soybeans is 4140 yuan/mt, so the 300-yuan purchase subsidy equals 7.2 percent of the price.

Farmers in Heilongjiang also get producer subsidies of 133.46 yuan per mu for growing corn and 173 yuan/mt for growing soybeans. The payments are awarded based on the actual area planted in these crops (15 mu = 1 hectare of land). Jilin Province also gives these subsidies, but the Jilin Government has not announced the amount.

Let's convert the Heilongjiang producer subsidy payments to yuan/mt. Assuming a corn yield of 400 kg/mu (6000kg/ha), the corn subsidy equals 333.65 yuan/metric ton. That's equal to 19.3 percent of the 1725-yuan/mt purchase price. Assuming a soybean yield of 140 kg/mu (2100kg/ha), the soybean producer subsidy equals 1235.7 yuan/metric ton, which is equal to 29.8 percent of the 4140-yuan/mt purchase price.

We're still not finished. China has a nationwide "support and protection subsidy" for all farmers who plant grain crops. This subsidy consolidates the previous "three subsidies" (direct payment, improved seed subsidy, and general input subsidy). Land planted in corn and soybeans or any other grain crop is eligible for this subsidy. According to government publicity, farmers get a subsidy based on their land holding unless they plant non-grain crops, leave land idle for multiple years, or build structures on the land. "New-type farmers" who rent-in land are eligible to receive the subsidy if they have an agreement specifying whether lessor or lessee receives the subsidy payment.

In theory, the "support and protection" subsidy is supposed to fund land fertility improvements, but an announcement of the subsidy in Heilongjiang makes no mention of this, nor does it mention any conditions for receiving the funds. The announcement proclaims, "If you register your land, then you can get the subsidy!" The announcement also emphasizes that this is separate from (i.e., in addition to) the corn and soybean producer subsidies. Thus, in Heilongjiang a farmer who plants corn on his land should get the support and protection subsidy and the producer subsidy for corn. Same for those who plant soybeans.

In Heilongjiang, the support and protection subsidy is 71.78 yuan/mu this year (Again, Jilin has not announced its subsidy). If corn is planted on the land and the yield is 400 kg/mu, the support and protection subsidy equals 10.4 percent of the current corn price in Heilongjiang. If the land is planted in soybeans, the support and protection subsidy equals 12.4 percent of the current soybean price.

2017/18 Subsidies in Heilongjiang Province
Corn (assume yield 400 kg/mu):
  Processor purchase subsidy 150 yuan/tonne 8.70%
  Corn producer subsidy 133.46 yuan/mu 19.30%
  Support and protection subsidy 71.78 yuan/mu 10.40%
Potential total corn subsidy 38.40%
Soybeans (assume yield 140 kg/mu)
  Processor purchase subsidy 300 yuan/tonne 7.20%
  Soybean producer subsidy 173 yuan/mu 29.80%
  Support and protection subsidy 71.78 yuan/mu 12.40%
Potential soybean subsidy 49.40%
note: 15 mu = 1 hectare of land. Processor subsidy available only for corn and soybeans purchased March 23 - April 2018, 2018.

The window for the processor subsidies is relatively short--only corn and soybeans purchased between March 23 and April 30 will be eligible. This subsidy appears to be intended to ensure that leftover corn and soybeans at the end of the marketing season gets purchased before authorities begin auctioning off corn reserves in May--which is expected to push prices downward.

In total, the Heilongjiang government could pay out three subsidies equal to 38 percent of the value of corn and over 49 percent of the value of soybeans for the relatively small volume that receives all three subsidies. It would appear that all corn produced in Heilongjiang should at least be eligible for the producer subsidy and the support and protection subsidy--a total of 29.7 percent of the purchase price. Similarly, all soybeans in Heilongjiang should be eligible for these two subsidies--equal to 42.2 percent of the purchase price.

Farmers nationwide get the support and protection subsidy. But the three northeastern provinces (Heilongjiang, Jilin, and Liaoning) and Inner Mongolia are the only regions that have the producer subsidies for corn and soybeans. So far only Heilongjiang and Jilin have the corn and soybean processor subsidies. Thus, northeastern farmers are the most heavily subsidized farmers in China.

Wednesday, March 21, 2018

China Views on Dumping and Farm Subsidies

Two recent Chinese commentaries reveal commonly-held beliefs about American farm subsidies that are behind Chinese antidumping and countervailing duty investigations of U.S. farm products like chicken, distillers grains, sorghum, and maybe soybeans.

A March 7 article, "Influence of U.S. agricultural subsidies on world agricultural trade" from the State-supported Futures Daily was posted on the Ministry of Commerce's WTO information web site and a number of other Chinese sites. The unidentified author asserted that imports of sorghum from the U.S. "receive subsidies from the U.S. government," which allow them to be exported to China at a price lower than the "normal value," and "there is a significant degree of dumping." The implicit assumption is that the Chinese price is the "normal" value, and any price lower than the Chinese price must be abnormal--the "middle kingdom" is the center of the world, after all.

A March 20 article by a commentator with the nationalist Global Times, "Subsidized American Soybean Exports Seriously Pressure China's Soybean Farmers," says "everyone knows" China must impose strong limits on imports of soybeans from countries that give huge subsidies that create an "unfair advantage." This author recites statistics to show that America dominates the world soybean market, has been increasing soybean production, and is responsible for excess supply in the world.

These claims of U.S. dominance contrast with recent American news media reports fretting about loss of soybean market share to Brazil and China's purported preference for Brazilian soybeans.

The sorghum commentator asserts that the U.S. government boosts farm exports using export credit guarantees, "export expansion plans," and "huge subsidies" for fuel, fertilizer and pesticides. The soybean commentary acknowledges that the U.S. government says its subsidies are a small proportion of farmers' income and comply with WTO rules, but he dismisses these claims and accuses the United States of "sabotaging WTO rules."

A logical fallacy common to Chinese findings of "dumping" is to assert that a correlation of two data items proves that one causes the other. The sorghum author explained that "the price continued to decline as large volumes of U.S. sorghum entered the China market." The Ministry of Commerce's announcement of the sorghum investigation correlated declining Chinese sorghum prices with high imports of U.S. sorghum.

A Ministry of Agriculture report on the 2016/17 sorghum market, however, attributed the decline in Chinese sorghum prices to declining Chinese corn prices. This report observed that Chinese farmers planted 32 percent more sorghum in Heilongjiang Province, 15 percent more in Jilin Province, and 22 percent more in Liaoning Province during 2016 compared to the previous year--at the same time the Ministry of Commerce claimed imports of sorghum were depressing profits for Chinese sorghum farmers.

The soybean commentator asserts that imports of U.S. soybeans caused a decline in Chinese soybean production. In fact, the decline in Chinese soybean production was due to Chinese farmers' corn-planting mania generated by a high corn price guaranteed by the Chinese government that made corn much more profitable than soybeans. While the soybean commentator celebrates the long history of soybean-planting in China, under communist authorities soybeans have always been a minor crop because plans and policies favored grains that have higher yields per hectare.

Thirty-eight years ago, a USDA report on China's agricultural market situation commented: "China will again attempt to expand soybean production in 1980, although past efforts have had little success." Stagnant soybean production in China is nothing new.

The sorghum author asserts that the United States became the leading agricultural exporter using a "low price plus high subsidy" strategy. To prove this, the Chinese writer cites USDA estimates of farm production costs and returns for 1975 to 2014 for six major commodities which show that costs exceeded revenues in most years. Although "farmers couldn't make money from the market, they were able to maintain their income by receiving subsidies from the government," the Chinese author concluded.

It's true that farmers in the United States make money in some years and lose money in other years, but the losses are not as pervasive, nor as big as the Chinese author concludes from scanning the USDA estimates. He does not understand that the USDA's cost estimates include a large proportion of imputed "opportunity costs"--the market value of family labor and land owned by the farm family. Cash expenses for many farms are less than the full "economic costs" in the USDA accounts.

USDA estimates of cash income for the farm sector as a whole show that government payments equal about 2-to-3 percent of gross income for farms. The net cash income for U.S. farmers peaked at $135 billion in 2012 and 2013 and is forecast to be just $92 billion in 2018. Direct payments from the government did not make up for the decline in income--in fact, payments from the government fell from $11 in 2013 to an expected $9.2 billion in 2018.
 Source: data from https://www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/data-files-us-and-state-level-farm-income-and-wealth-statistics/

Most U.S. farmers and their spouses work at off-farm jobs to make ends meet and to get health insurance coverage. USDA estimates show that farming families receive about 80 percent of their income from nonfarm sources. Moreover, Chinese critics do not understand that American farmers are business-men and -women who invest and borrow hundreds of thousands or millions of dollars and spend years buying and renting land to build up a viable farming operation.

Chinese critics also implicitly presume that countries should be self-sufficient. The sorghum essayist notes that "commodity surpluses are the main feature of U.S. agriculture, so the industry is extremely reliant on exporting." The soybean commentator criticizes the United States for producing more soybeans than are needed by the U.S. market, creating "surpluses" in the world market. Why wouldn't a country with a large endowment of highly productive farmland export commodities to densely populated countries?

Chinese critics overstate the dominance of U.S. commodities. High world prices during 2007-08 and 2011-12 encouraged farmers all over the world to produce more cotton (India), corn (Ukraine), and soybeans (Brazil). Brazil's expansion of soybean production--mostly to sell to China--is the dominant source of recent growth in soybean supplies. Brazil accounted for nearly half of China's soybean imports last year.

A few Chinese writers understand U.S. farm programs better than most Americans. In a November 2017 Farmers Daily essay, Ke Bingsheng, an agricultural economist and president of China Agriculture University, explained that U.S. farm subsidies are constantly evolving and being revised. Prof. Ke explained that the 2014 Farm Bill had hundreds of pages and is incomprehensible even to those who understand all the English words. He warned readers that they could arrive at erroneous interpretations if they don't understand the historical background of U.S. policies.

Prof. Ke recalls lessons he learned about American farm policy from conversation with USDA officials during a trip to the United States. More open discussion and interaction like Prof. Ke has engaged in would help dispel mistaken presumptions that result in both sides talking past each other on these issues.

Tuesday, March 13, 2018

Can Africa Get Chinese Guidance on Agricultural Development?

At a March 7 press conference two African journalists asked China's Minister of Agriculture what Africa can learn from China about agricultural development.

The Minister assured the journalists that China is a good friend to Africa and hopes for even more cooperation in agriculture. His answer focused on China's technical aid to Africa: opening rice-growing demonstration centers in Africa, sending numerous technicians to Africa, and training thousands of African technicians and officials in China. He celebrated China's success in addressing its food security problems and noted that Africa still has a food security problem.

China's Ag Minister said he was eager to share China's rural development experience, but he was vague and equivocal on exactly what advice or guidance China could give to African countries. His response boiled down to an admission that China has no transferable formula for agricultural development. China's experience is peculiar to its own circumstances.

If they were listening to the rest of the press conference, the African journalists might have deduced that China's approach to agricultural development has resulted in huge, festering problems that the leadership is now trying to correct: high production costs, low productivity, backward technology, environmental devastation, a food safety crisis, and "hollow villages" composed of empty houses.

The main focus of the Minister's press conference last week was a giant "rural revitalization" experiment aimed at dealing with the above problems and stimulating growth in agriculture, the one sector of China's economy that is lagging behind and stagnant--the so-called "short board"--starved of investment for decades. 

The Minister did not mention the slogan "cities like Europe, countryside like Africa" that many Chinese people have used to describe the neglected countryside. Turning dilapidated, trash-strewn villages into a "beautiful countryside" is now one of the pillars of China's rural revitalization.

The African guests could learn from what the Minister didn't say.

The Minister did not mention that China's experience shows that technology is less important in developing a strong agricultural sector than are institutions such as land ownership, administrative structures, laws clarifying and protecting property rights, controls on marketing and prices, and the incentives they create.

Beginning in the 1950s, China's farm output stagnated or declined every time leaders tried to force peasants into farming collectives. Agriculture revived every time officials tolerated private plots, individual livestock-raising, and free markets. China's agricultural output finally took off after 1978 when land was contracted out to individual families.

China's Minister of Agriculture did not mention that Chinese agricultural output likewise suffered each time Chinese leaders tried to monopolize purchases of grain, shut down free markets, and set low prices to extract funds from farmers. China's farm production only began to show sustained growth when free markets were reintroduced for good and prices were liberalized. Chinese communists have embraced the doctrine of the market playing a decisive role in resource allocation in their agricultural strategy.

A major subject of the Minister's press conference last week was discussion of how to dispose of a huge glut of grain created by another attempt at government price-setting. This took the form of minimum prices and "temporary reserves" that pushed Chinese grain, cotton, and soybean prices out of kilter with world prices during the most recent decade and resulted in huge expense, wasteful accumulation of massive grain reserves and record imports of grain.

The Minister dismissed an African reporter's query about reports of "plastic rice" (bits of pvc plastic mixed with rice) and how the safety of rice exports to Africa can be assured. China's search for a means of guaranteeing food safety and upgrading the poor quality of its food is another preoccupation of the current "rural revitalization" initiative. For decades, China's rural system rewarded only increases in physical output and numerical targets, which induced farmers to maximize output without regard to quality. Cleaning up poisonous "cadmium rice" was one of the projects mentioned in the press conference.

Neither did the Minister discuss the devastating impacts of subsidizing chemical fertilizer, plastic sheeting, pumping water from underground aquifers at minimal cost, indiscriminate use of pesticides and animal antibiotics, neglecting soil fertility and ignoring disposal of animal manure and other wastes. "Green" development is another core idea of China's rural revitalization to reverse the dire consequences of vague property rights that allow producers to ignore the costs their production imposes on other members of society and future generations.

Monday, March 12, 2018

China's Corn Market Tight?

At a March 7 press conference, China's Minister of Agriculture warned farmers not to "blindly" expand planting of corn this spring, pointing out that government reserves are still high and international prices are still relatively low. Other analysts attribute a suddenly-tight corn market to rapid disposal of corn stockpiles.

Minister Han Changfu advised listeners that China's strategy in agriculture is to let the market have a decisive role in resource allocation. He then ordered farmers not to respond to recent increases in market prices that are prompting them to expand corn planting this spring. Minister Han warned that an expansion of corn-planting--especially in regions that don't have a comparative advantage in growing corn--would reverse the Ministry's "supply side structural adjustment" designed to reduce excess corn production capacity. Minister Han urged farmers to continue the structural adjustment by planting crops that are "demanded by the market."

The Ministry's March China Agricultural Supply and Demand Estimates reported that the price for corn has been rising as supplies of new corn get tight. The March report increased its estimate of 2017/18 corn consumption by 1.5 million metric tons to 224 mmt to reflect the tighter market conditions. This reflected an increase in industrial use of corn to 64.8 mmt. Industrial processors are restarting production after the Lantern Festival holiday and adding to inventories, the MOA report said. Auctions of government corn reserves are due to resume--perhaps later this month--which MOA says will relieve upward pressure on prices.

The MOA report shows a -6.72 mmt deficit between supply and demand for 2017/18. However, MOA warns that the corn market still faces pressure from high inventories which will prevent prices from rising too much. MOA expects the wholesale price of corn in production regions to remain in the 1600-1700 yuan/mt range.

An analysis by futures market analysts says China's corn market has already shifted from surplus to shortage and estimates a supply-demand deficit of -48 mmt for 2017/18. These analysts think China's corn stockpile could be cut nearly in half from its 2016 peak after a further 60-mmt sales of corn reserves this year.

Their estimates are based on corn auction results: 57 mmt auctioned during 2016/17 less 21-mmt new corn procured for reserves equals a net decline of 36 mmt. However, they think 20-mmt of this injection of corn was carried over into 2017/18 as commercial inventories. That means they think the supply-demand deficit for 2016/17 was -16 mmt.

These analysts see a much bigger S&D deficit for 2017/18 of -48 mmt which they attribute to: a decline in production, a decline in imports of sorghum imports, and an increase in industrial use. It's not clear how they got this number. 

The analysts estimate that lower corn prices have increased capacity utilization of corn processors by 10-15 percentage points. Moreover, they estimate that 6.8 mmt of new processing capacity was brought on line during 2017, and 12 mmt more is planned for 2018. China's National Grain and Oils Center is more bullish than MOA on industrial use of corn, estimating a 14-mmt increase to 68 mmt in 2016/17 and a further 10-mmt increase in 2017/18 to 78 mmt.

These analysts estimate that imports of corn, sorghum, barley, DDGS, and cassava replaced 16.5 mmt of corn during 2016/17, 5 mmt less than the previous year. They think the antidumping investigation will further reduce imports of U.S. sorghum this year by 2.5 mmt.

Tuesday, March 6, 2018

In China, "Democratic life" = President-for-life

Illustrating the country's slide into Orwellian totalitarianism, China's communist party has been holding "democratic life meetings" that are the antithesis of democracy: attendees pledge loyalty to the undisputed leadership of Xi Jinping and repent of any ideological deviation from Xi's thoughts.

A central "democratic life meeting" for the Politburo was held by Comrade Xi on December 25-26, 2017 to study "Xi Jinping's Thought for Socialism With Chinese Characteristics in a New Era." The Politburo pledged to preserve the centralized authority of Comrade Xi Jinping as core leader of the central communist party committee and to fully implement each item decided by the 19th party congress.

The December meeting is a model for lower levels of the communist party. On February 2 the communist party organization of China's Ministry of Agriculture held a "democratic life meeting" chaired by the Minister of Agriculture and Party Secretary Han Changfu where attendees made the same pledge of fealty to Comrade Xi's centralized authority and to study and implement his thoughts. The "democratic life" meetings demand unity of thought, constant display of party loyalty, honesty, and clear direction. At the Ministry of Agriculture meeting, party members resolved to rely on Xi's thought to direct work on rural affairs and agriculture.

The "democratic" meetings also serve as a means of ensuring complete devotion and ideological purity. In an echo of China's "cultural revolution" era, the Ministry's meeting demanded that attendees seed out problems, engage in self criticism, and criticize each other. Officials were ordered to dig deep to examine ideological roots, criticize others to really help them, "don't hide or avoid," and reach unity through criticism.

According to a Chinese-language Wikipedia page, the "democratic life meetings" are internal meetings for dialogue and self-criticism that date back to at least 1990. Xi Jinping revived the meetings in 2013 as part of his anticorruption campaign.

Now, it seems, "democracy" means pledging complete loyalty to a "President-for-life" and helping comrades root out any doubts they may have about totalitarian rule and a personality cult.


Tuesday, February 27, 2018

China Revitalizing Its Food Exports

China's agricultural exports plateaued in recent years due to rising costs that eroded competitiveness, a poor reputation for quality, and a more favorable market at home. Authorities are now trying to revitalize exports by upgrading quality, using integrated industrial management models, and creating new markets through the One Belt One Road initiative.

The "Central Document No. 1" on rural policy priorities for 2018 called for China to build a new externally open pattern for agriculture. At a February 8 press conference Minister of Commerce Gao Feng asserted that the new pattern of externally open agriculture is essential for "rural revitalization" and the overarching objective of making China a strong country in international trade.

Specific strategies include promoting trade with countries and regions along "One Belt One Road" routes and promoting exports of high value-added and specialty Chinese agricultural products.

An October 2017 article by China's Industry Information Network proclaimed that the Belt and Road initiative is giving China's agricultural exports new vitality by diversifying markets. The article cited free trade agreements with South Korea and Australia and strong growth in exports to Canada, Mexico, India, Pakistan, South Africa, Saudi Arabia, and Turkey as signs of revived confidence for China's agricultural exporting enterprises. Favorable policies and the Belt and Road initiative lay a "good foundation for exports to Northeast Asia, Central Asia, and the Middle East," the article stated.

The favorable policies included a restoration of 13-percent VAT refunds for exports of corn starch, distillers grains, and other corn-based industrial products as of September 2017. Inspection and testing fees are waived for food exporters, a benefit said to be worth 11 billion yuan to exporters.

Developing business models that integrate production, processing and marketing under a single company's control are said to strengthen export competitiveness. Another strategy is delineation of regional industry belts, including a tea belt in Sichuan, vegetable processing and crabs in Zhejiang Province, and flower and medicinal herb districts in Yunnan Province. Constructing foreign trade bases will support future agricultural exports, the article explained. 

The article also claimed China had won victories in dismantling technical barriers to Chinese products in other countries, including Indonesia's abandonment of safeguards on imported glucose and successful challenges of an EU anti-dumping investigation of concentrated soy protein products and tariff rate quotas on duck meat imports. The article says USDA's favorable assessment of China's food safety system for processed chicken brightens the prospects for Chinese chicken to reach America in the future.

The Ministry of Agriculture reported that agricultural exports totaled $75.5 billion during 2017, up 3.5 percent from the previous year.

Another China Industry Information Network article from December describes efforts to upgrade remote border crossings in western China to promote exports of vegetables and fruits to dinner tables in Central Asia and Russia. "Green channel" to expedite shipments of perishable products have promoted rapid double-digit growth in exports of tea, sunflower seeds, fresh garlic and fresh apples at the Irkeshtam crossing into Kyrgyzstan. Licorice, leather, and dried fruit have come into China. In November a refrigerated truck carrying tangerines and apples from Xinjiang's Tacheng City crossed the border at Qoqek and delivered the products to Askana and Almaty in Kazakstan, to Moscow, St. Petersburg and Chelyabinsk in Russia, and to other countries in Europe.

According to Urumqi District customs statistics, during January-October 2017 Xinjiang exported 320,000 mt of ag products (up 13.8%) valued at RMB 2.72 billion (up 20%). Freight at the Qoqek crossing point totaled 50,000 metric tons in 2013, and was up to 102,000 mt in 2017. Agricultural product exports include citrus, fresh peaches, apples, grapes, tomatoes, peppers, and garlic.

China 2017 Ag Imports: Sucking Sound and Squealing Brakes

If you couldn't hear the great sucking sound of China hoovering up agricultural commodities, it may have been because it was drowned out by the chugging of industrial exports. Or maybe your ears were hurting from the squeal of brakes applied to particular farm commodities targeted for antidumping or safeguards.

China's imports of agricultural products were valued at $125.9 billion during 2017, up 12.8 percent from the previous year, according to data reported by the Ministry of Agriculture. Agricultural exports totaled $75.5 billion and rose 3.5 percent.

According to the Ministry of Commerce, agricultural imports represented 6.8 percent of the value of all Chinese imports in 2017, while agricultural exports accounted for 3.3 percent of all exports. The brief Commerce Ministry report emphasized that the $49.5-billion deficit in agricultural exports grew 30 percent from the previous year. It did not mention that the deficit in agricultural trade is relatively modest in comparison with China's overall trade surplus of $422.5 billion.

Nor did the MofCom report on ag trade mention numbers in another MofCom report which showed the overall trade surplus (in Chinese yuan) grew 14.2 percent. While Chinese officials will sound alarms about the 12.8-percent increase in agricultural imports, this was a slower rate of growth than the 15.9-percent growth in all imports (in dollars).

Oilseeds ($43 billion) accounted for about a third of the value of China's agricultural imports during 2017. Oilseed import value was up 16.2 percent. Imports of edible oils totaled an additional $5.7 billion, and rose 12.5 percent. Imports of cereal grains totaled $6.5 billion, and rose 13.7 percent. China spends more on importing fruit than it does on importing cereal grains (see below).

Cotton imports totaled $2.36 billion and rose by 32.7 percent, the fastest rate of growth of the major categories (mostly due to higher prices).

Livestock products are the second-largest agricultural import category, with $25.6 billion, up 9.5 percent during 2017. China's leading agricultural export ($21.2 billion) was fish and shellfish, but it also is an importer ($11.35 billion) of aquatic products. Exports of vegetables totaled $15.5 billion. Exports of fruit totaled $7.1 billion. However, China also imported $7.6 billion of tropical and southern hemisphere fruits.

China 2017 value of agricultural imports and exports
Item
Imports ($bil)
Growth (%)
Exports ($bil)
Growth (%)
Agricultural products
125.86
12.8
75.53
3.5
Grains
6.49
13.7
0.8
57.8
Cotton
2.36
32.7
na
Sugar
1.08
-7.9
na
Oilseeds
43.02
16.2
1.64
15.2
Edible oils
5.68
12.5
0.24
49.5
Vegetables
0.55
4.3
15.52
5.4
Fruit
6.26
7.6
7.08
-0.9
Livestock products
25.62
9.5
6.36
12.7
Aquatic products
11.35
21
21.15
2

China's agricultural import volume rose at a robust pace overall, but imports of a few items declined sharply due to Chinese policies.

Cereal grain imports totaled 25.6 million metric tons (mmt), up 16.4 percent. Barley imports were up 77.1 percent, wheat imports were up 29.6 percent, and rice imports were up 13 percent during 2017.

However, imports of corn, DDGS, and sorghum were all down sharply. Each of these is a substitute for corn -- disposal of huge government corn stocks was a priority for Chinese rural policy during 2017. DDGS imports -- hit by anti-dumping and anti-subsidy duties in 2017 -- were down 87 percent. Similar duties are expected to hit U.S. sorghum in 2018.

Despite the efforts to choke off these imports, combined imports of corn and substitutes (barley, sorghum, DDGS, cassava) totaled 25.3 mmt during 2017, almost the same as the 25.6 mmt total reported for 2016.

China has prioritized a similar stock disposal program for rice in 2018. The disposal of rice stocks began during 2017 with rice exports surging from under 400,000 mt in 2016 to 1.2 mmt during 2017.

A surplus stock disposal effort for cotton has been underway for three years. Cotton import volume during 2017 was 1.36 mmt, up 9.9 percent from 2016 when cotton imports were in lockdown mode. During 2016 cotton imports were held to the quota set in China's WTO accession commitments in 2001 when the textile industry was a fraction of its current size. Cotton imports bounced back a little during 2017 but are still lower than any year from 2004 to 2015. Yarn imports -- a substitute for cotton -- were stable in 2017.

The volume of imported sugar (2.29 mmt) was down 25 percent after the out-of-quota tariff was boosted from 50 percent to 95 percent and a special safeguards investigation was launched during 2017...and the government is trying to dispose of excessive stockpiles.

While Chinese officials obsess over grains, the country's voracious appetite for grease is reflected by 95-mmt of soybean imports for the calendar year (up 13.8 percent), plus rapeseed imports of 4.75 mmt (up 33 percent), palm oil imports of 5.1 mmt (up 13.4 percent), rapeseed oil imports of 757,000 mt (up 8.2 percent), and soybean oil imports (up 16.6 percent). Sunflower oil imports of 745,000 mt were the only item in this category whose import volume fell (down 22.1 percent).

China's imports of pork (1.2 mmt) and pork offal (1.28 mmt) were both down in 2017 as domestic prices plunged from record highs reached in 2016 and a bevy of domestic pig-supply companies expanded aggressively to grab market share after the departure of backyard farmers. Imports of beef, mutton, and milk powder were each up in double digits. The opening of China's market to U.S. beef last year was not a factor in these numbers. Nearly all the imported beef was supplied by Brazil, Uruguay, Australia, and Argentina while the United States remained a tiny supplier.

China 2017 volume of agricultural imports
Item Imports (1000 mt) Change (%)
Cereal grains 25,601 16.4
Wheat 4,422 29.6
Corn 2,827 -10.7
Rice 4,026 13.0
Barley 8,863 77.1
Sorghum 5,057 -23.9
DDGS 391 -87.3
Cassava 8,128 5.5
Cotton 1,363 9.9
Yarn 983 0.8
Sugar 2,290 -25.2
Soybeans 95,526 13.8
Rapeseed 4,748 33.2
Palm oil 5,079 13.4
Rapeseed oil 757 8.2
Sunflower oil 745 -22.1
Soybean oil 653 16.6
Pork 1,217 -24.9
Pork offal 1,282 -14.1
Beef 695 19.9
Mutton 249 13.1
Milk powder 1,040 22.9

Monday, February 19, 2018

Russian Soybeans Pressure China Market

China imported a record 515,000 metric tons of soybeans from Russia during calendar year 2017, according to customs officials. This new source of soybeans -- while still a tiny share of China's overall soybean market  -- may be a bigger problem for domestic Chinese soybean farmers than huge imports from North and South America.

The Russian soybeans are mostly grown by Chinese farmers who lease farmland in Russia's Far East. The farmers are mainly from Heilongjiang Province, China's far northeastern province which borders Russia. Heilongjiang is China's top soybean-producing province, accounting for about a third of China's production.

The Russian Far East is one of the earliest and largest targets for Chinese investment in foreign farms. Chinese farmers are attracted by low land rents in Russia that are a fraction of what they pay on the Chinese side of the border. Heilongjiang Provincial officials and a number of local governments have been supporting Chinese farming efforts in Russia for nearly 15 years, making deals with Russian counterparts and giving various subsidies. However, Chinese farmers returned little of what they produced in Russia to the Chinese market until recently.

In the last few years, China's central government has prioritized agricultural trade with Russia as part of its "One Belt One Road" initiative. China built its first foreign agricultural industry park in Russia and upgraded inspection and quarantine services at border crossings to facilitate the return of crops grown in Russia to the Chinese market. The report on soybean imports emphasized that Heilongjiang is the leading province for cooperation with Russia and declared the "expansion of non-GMO soybean supply" to be a "remarkable result" of the inspection and quarantine bureau's efforts to lower the threshold for farmers to return their Russia-grown grains to the Chinese market. The inspection and quarantine service formulated a risk assessment system for Russian crop imports to control disease risk, ensure soybeans are non-GMO, and established a traceability system.

In addition to the soybeans, customs authorities also reported imports of 11,764 metric tons of soybean oil from Russia during 2017 arriving at Heihe City, the most active border crossing on the Amur River. The report praised the surge of Russian flour, soybean oil and other foods as "natural" and "unpolluted."

Heilongjiang farmers have been complaining that the Russia soybeans are depressing prices in the China market. A November 2015 report blamed the surge of Russian soybeans for the depressed market, noting that the Russian beans were comparable in quality to Heilongjiang soybeans but substantially cheaper. That report estimated the flow of soybeans from Russia to 1 million metric tons--nearly three times the amount reported by customs statistics that year. The price of soybeans after arriving from Russia was reported to be 3600-3700 yuan/metric ton, well below the 4100 yuan/metric ton price of local Chinese soybeans.

The 2015 report said Russia bans production of GMO soybeans and pesticides, so the beans grown there are positioned as a non-GMO or even organic product that competes directly with Chinese non-GMO soybeans. The Russian beans were said to be low in protein and have high contamination with foreign matter, but Chinese soybeans also had quality problems that year. The reporter said the bottom line was that Russia-grown and Chinese soybeans are comparable in quality but the Russian beans are cheaper. The reporter blamed pressure from Russian beans for preventing Chinese prices from rising.

Customs statistics indicate that the Russian soybeans have prices that are 1000 yuan or more less per ton than Chinese beans -- even after adding the tariff and value added tax (see chart). Also in 2015, a weibo poster found that customs data showed Russian beans cost 1930 yuan/mt compared to 3550 yuan for imported "GMO" beans, and he asked, "Are Russian soybeans really that cheap?"

Note: imported Russian price calculated from customs statistics plus 3% tariff and 13% VAT (11% July-Dec 2017). Imported (coastal) is price in Qingdao, also including taxes. 

The post revealed that Heilongjiang customs officials were also alarmed about this issue and "held many meetings" to learn what "the real price of Russian soybeans" was. The Russian soybeans were imported largely by farmers that grew them, so they were in effect selling the beans to themselves and could name their own price. Of course, their incentive was to report a low price to minimize the tariff and value-added tax they had to pay. The weibo author found that Russian soybeans offered on e-commerce web sites quoted prices much higher than those reported in customs data, so he concluded the customs prices were artificially low. Nevertheless, the prices quoted for Russian beans were still much lower than the price for similar Chinese beans.

A crop inspection tour in northern Heilongjiang last summer concluded that Russian soybeans continue to influence the Chinese market. A seed company sold 100 metric tons of soybean seeds to Russia last year. The manager of a processing plant cited the non-GMO, pesticide-free, and -- in his assessment -- high protein as advantages of the Russia-grown beans. He also estimated the volume of imports from Russia to exceed what is reported by customs data. The processing plant manager estimated the production cost of Russia-sourced soybeans at 2300-2400 yuan and the price in China at 3900 yuan/metric ton -- big profits. He was pessimistic about the market for Chinese soybeans, but saw bright prospects for Russian soybeans in China.

Over the years, China's soybean market has become segmented into largely separate markets for imported and domestic soybeans, but imported soybeans from Russia  break that pattern by competing directly with Chinese soybeans. The main Chinese soybean producing areas are insulated from imports by distance and a non-GMO wall the industry has worked hard to raise over the last 15 years to differentiate domestic from imported soybeans. Soybeans imported from North and South America arrive at crushing plants at coastal ports. The closest one is  more than 500 miles from Heilongjiang, and the most active ports for imported soybeans in Shandong and Jiangsu Provinces are over 1000 miles away.

Russian soybeans, meanwhile, arrive on the doorstep of domestic soybean producers in Heilongjiang Province. The non-GMO wall does not protect Chinese soybeans from Russian beans since the Russian soy is purportedly also non-GMO and even organic. Thus, China's "going out" strategy has created a new source of soybeans that competes head to head with domestic soybeans without any of the insulation factors built up against soybeans from the Americas.

Is Dr. Frankenstein advising China? Or, as the weibo poster cited above asked sarcastically, "Has the Chinese Government become an agent of Monsanto?"

Sunday, February 18, 2018

China Mulls Soybean Trade Retaliation

Chinese officials have been mulling retaliatory trade action against imports of U.S. soybeans. While soybeans loom as a big target in a trade war, such an action would cripple dozens of Chinese importers and undermine the country's new "open economy" strategy in agriculture.

One commentary on the Chinese Internet this week called soybeans "potentially China's strongest weapon" as trade friction with the United States heats up. The commentator suggested that a measure limiting soybean imports could cause President Trump to lose the 2020 election by hitting farmers in the U.S. Midwest. Yet the commentator also noted that limiting the soybean supply could lead to higher pork prices in China since soybean meal is an important component of pig feed.

China's Commerce Minister Gao Feng struck a conciliatory tone in comments at a February 8 news conference which was largely about trade friction with the United States. Minister Gao said the Ministry had met with industry associations to explore possible impacts of trade measures against imports of U.S. agricultural commodities (soybeans and cotton were mentioned specifically by the journalist who asked the question). Gao's main comment was that some "production-type" enterprises had raised concerns about the effects of limiting imports. [erratum: another article discovered later suggests that the companies were worried about the effects of imports.] The Minister then emphasized the importance of resolving trade difficulties to achieve mutually beneficial outcomes and to turn friction into energy. Minister Gao made similar conciliatory comments about beneficial trade and cooperation in the Ministry's earlier announcement of the antidumping investigation of U.S. sorghum imports.

A trade action against soybeans -- the biggest component of international trade in farm products -- would undermine China's efforts to craft its image as a proponent of global trade. In his response to a separate question, Minister Gao emphasized that a "new pattern of externally open agriculture" is central to China's rural revitalization strategy featured in the "Number one document" issued by communist party leaders this month. According to Gao, the strategy for China's rural makeover features greater engagement with global markets in which Chinese companies have greater control over a swelling flow of agricultural imports, Chinese farmers link up with commercial entities to export high quality farm goods demanded by the market, and China gains a stronger voice in multilateral organizations that set the rules for international trade.

Bolstering China's image as a proponent of global trade is a long-term strategy critical to the "One Belt One Road" initiative as well as to broader geopolitical objectives. Officials may hesitate to undermine their long-term image-building project in order to score points against Americans in a tit-for-tat trade skirmish.

A February 5 commentary noted that China has major domestic commercial interests that rely on soybean imports. The commentator observed that China's soybean industry has demanded action to limit soybean imports on several occasions over the past 15 years, but authorities have never imposed any major measures. This commentary pointed the inconsistency of launching antidumping investigations against imports of U.S. DDGS and sorghum, yet never conducting an investigation against imports of soybeans even though China's soybean industry is purportedly under the greatest pressure from imports.

According to the commentator, China's soybean industry called for an action in 2004 after a sudden drop in U.S. soybean prices devastated Chinese importers holding contracts to import at high prices (the so-called "soybean crisis"). In the commentator's opinion, China "lost the perfect opportunity" because there was little knowledge of how to launch trade remedy measures and many in the Chinese industry were willing to be rescued by being acquired by foreign companies.

The commentator recalled that a trade action against soybeans had been proposed in 2009 to retaliate against punitive U.S. tariffs on Chinese tires. However, powerful companies "inextricably tied" to soybean imports opposed the move, the commentator said. Instead, he pointed out that China chose to launch an antidumping action against imported U.S. chicken meat -- a much smaller trade item than soybeans.

According to the commentator, some individuals opposed to last year's antidumping tariffs on U.S. DDGS argued that antidumping duties could not be justified for DDGS if they were never imposed on soybeans.

In fact, the DDGS and sorghum antidumping trade actions were taken largely to facilitate China's own commodity dump: selling off China's massive corn reserves into its domestic market at prices below the government's acquisition cost. Imported DDGS and sorghum are substitutes for corn, and an article in the China Times reported that targeting DDGS and sorghum for punitive duties makes it easier to sell off the government's corn stocks by reducing the supply of cheap substitutes. China Times linked the sorghum antidumping investigation to the directive in this year's "Number one document" to accelerate the disposal of government grain inventories by improving auction and sale mechanisms.

None of the commentaries delve into the facts that make a punitive tariff against U.S. soybeans improbable. Here are a few additional considerations.

China's capacity to shift soybean purchases to other suppliers is limited. China imports two-thirds of the soybeans traded in the world, and about 35-40% come from the United States. Brazil already has been increasing its exports to China at a frantic pace for several years. Soybeans from southern hemisphere countries -- the main alternate suppliers -- are available mainly during April-September, and cannot substitute for U.S. soybeans imported by China during the northern hemisphere shipping season of October-April.

Punitive tariffs on soybean imports would hurt Chinese importers as much or more as it would hurt American farmers. Most soybeans are imported by hundreds of Chinese companies -- both state-owned and private. Multinationals--who were banned from further expansion ten years ago--no longer dominate the industry. Aggressive investment by Chinese players over the last decade has made domestic companies the primary operators of China's soybean crushing plants which are already plagued by excess capacity and razor-thin margins.

China's own soybean producers would benefit minimally from limits on U.S. imports. China's entire soybean harvest equals roughly two months of imports. Most of China's soybeans are now used for food processing industries at premium prices and do not compete directly with imported soybeans used for crushing to make vegetable oil and soybean meal for animal feed. Chinese farmers in the northeast expanded soybean production this year, but had difficulty selling the additional beans and the government had step in to buy them.

Chinese companies could import soybean oil and meal to some degree instead of importing soybeans. (precedent: when China tightened cotton import quotas several years ago, the textile industry started importing yarn which is not subject to a quota.) Imports of substitute oils like palm, rapeseed, sesame, olive oil would rise.

Smuggling and paperwork subterfuge would skyrocket. Customs officials would have to do extensive checking of paperwork and testing of shipments to verify the stated origin. Customs officials would have to be watched closely by anti-corruption investigators.

Chinese officials may recall stampedes at a supermarket by shoppers eager to get discounted cooking oil when soybean prices were in the stratosphere ten years ago.

The lack of protein in animal feed was a bottleneck for China's livestock sector until China started importing soybeans in the 1990s. Soybean meal now provides most of the protein in animal feed. The two biggest consumers of soybean meal -- pigs and chickens -- are in vigorous expansions this year. Watch for fake and adulterated soybean meal and disease outbreaks among poorly nourished livestock and poultry if soybean supplies shrink.

Monday, February 5, 2018

No. 1 Document Sets Rural Revitalization Program

A deep and broad "rural revitalization" program is the focus of the Chinese communist party's "Number one document" on rural policies for 2018. Chinese leaders describe rural revitalization as a key historic development that will mark China's new century of prosperity and strength in contrast to the previous century of weakness and exploitation by foreign powers.

The ambitious and idealistic program is purportedly inspired by the thinking of "core" leader comrade Xi Jinping. The program is aimed at finally "winning" the long-sought "relatively well-off society." There will be balance between countryside and city development, people will enjoy a good life, poverty will be eliminated by hooking up poor regions with thriving industry, the countryside will be beautiful, there will be harmony between humans and their natural environment, Chinese industries will produce quality products, Chinese products will be internationally competitive, R&D will drive development, yet traditional Chinese culture will be preserved and propagated. All of this is to be orchestrated by the communist party.

A TV graphic laid out objectives for rural vitalization for 2020, 2035, and 2050.

The 16,400-character rural revitalization program laid out in the Number one document is deep and wide. The program's mantras include "institutional innovation", "transformation," "upgrade," "quality" and "green." The program is unabashedly socialist yet industrial development is at the core of the strategy. Agriculture will be overhauled by nurturing new types of agricultural business operators, including family farms, cooperatives, and "dragon head" agribusinesses. The document calls for linking up farms with processing, input, and tertiary industry. The document specifically calls for developing a native dairy industry, singles out the domestic agricultural machinery industry for strengthening, and repeats the exhortation in previous documents to invest in agriculture abroad and to create large Chinese multinational grain-trading and agricultural conglomerates. The fight to eliminate rural poverty relies on setting up thriving industries in poor regions and replacing ramshackle dwellings with new modern housing developments.

Land is to remain collectively owned, but elaborate arrangements are supposed to facilitate consolidation of fragmented plots into internationally-competitive appropriate scale farms. Rural households are to have their land contracts extended for 30 years and receive certificates verifying their land holdings. Then the peasant land-holders can pool their land and turn it over to modern farmers. However, land will be under strict control over its use to ensure national food security. The appropriate scale farms are expected to not only earn profits from low-margin grain crops but also give training, credit, and technical assistance to small-scale rural households.

Bankers will march forward to finance the vast overhaul of rural China. They will make loans secured by abstract temporary production rights to far-flung plots of land. The document acknowledges that the countryside is already riddled with debts for infrastructure, but does not seem to think more debts incurred to level fields, build irrigation ditches, and construct housing developments in impoverished villages will be a problem.

After decades of polluting water, air and soil, and sucking the organic matter and nutrients out of the ground, China is now a proponent of green, sustainable development. According to Chinese leaders, "ecological live-ability is the key to rural revitalization," and "a good ecological environment is the greatest advantage and source of wealth for the countryside."

the rural revitalization program calls for combining thriving industry and a clean environment.

China's rural revitalization also aims to influence the world. There will be a more open trading environment with stronger trade relations with countries and regions along the "one belt one road" path. China hopes to boost exports of high-value specialty agricultural products. China aspires to play a stronger role in making rules that promote global food security and a more fair and equitable international agricultural trading system.

The "Number one document" sets broad goals for progress on rural revitalization. By 2020, there should be major progress in rural revitalization, with the institutional framework and policy system basically in place. By 2035, agriculture and the countryside should be basically modernized, agricultural structure improved, rural people should have better quality employment, basic public services should be equalized between city and countryside, rural civilization should have reached a new degree, and the rural governance system should be much improved. By 2050, rural revitalization should be complete, agriculture strong, the countryside beautiful, and peasants rich.

According to the document, China's communist party will "[raise] high the great flag of socialism with Chinese characteristics with guidance from Xi Jinping’s thought on socialism with Chinese characteristics for a new era, face the difficulties, work hard, forge ahead, to win the all-round well-off society, and make a great contribution to socialism with Chinese characteristics for a new era."

Wednesday, January 24, 2018

China: 31 Farmer Subsidies for 2018

The official "Voice of China" listed 31 subsidy programs to apply for in 2018 that illustrate Chinese leaders' plans to transform agriculture. According to Voice of China, agricultural subsidy programs will emphasize aid for businesses engaged in environmental protection, those that increase industry efficiency and those that strengthen food safety. The list below includes the name of each program and the dates for application. (Voice of China also listed the government entity to apply to, but these are excluded here for brevity.)

Applicants for these programs must be registered as enterprises (which would include farmer cooperatives, agribusinesses and "family farms" holding a business license, but not individual farmers). They must demonstrate adequate "business management capability" and cannot have a bad social credit score, nor can they be on a black list. Aid cannot exceed the expenses of the project and a project cannot be supported by multiple subsidies.

The programs below focus on developing new-type farms, cooperatives, agricultural service providers, farm-industry linkages, soil improvements. Many of these programs are ideas that have been tried before. For example, producing oils from tree nuts has been proposed every 15 years or so, and feeding crop stalks/straw to cattle and sheep was a big initiative in the 1990s that has been revived. The programs feature "model farm" approaches and upgrades of the animal breeding system that have been around since at least the 1950s. Also prominent is the "comprehensive agricultural development" begun in the 1980s, which finances an overhaul of farming infrastructure in a village or larger contiguous area, including development of a processing or other agribusiness linked up with farmers. Industrial parks are another long-time socialist favorite now being adopted for agriculture.

This does not appear to be an exhaustive list of agricultural subsidies. It does not include payments to the broad population of farmers, such as the "support and protection payment" for grain farmers, target subsidy for cotton producers in Xinjiang, nor direct payments to producers of corn, soybeans, and rapeseed in select provinces. The programs below appear to be special project aid that companies, cooperatives, and licensed farms can apply for, not broad entitlements to all farmers.

Directory of China agricultural subsidy/aid programs, 2018
Program description Application period
Model farmer cooperatives Jan-June
Cropland protection and quality improvement aid Jan-March
Aquaculture breeding and production model farms Feb-June
Projects raising livestock on crop straw Feb-June
Grassroots agricultural technology extension system aid Feb-March
Modern agricultural industrial parks March-April
Grain/cotton/oilseed/sugar high-yielding field construction March-May
Agricultural machinery purchase subsidy (for "green" projects) March-May
Aid for production of agricultural resources and ecological protection March-May
Agricultural disaster prevention fund March-May
Socialized services for the whole agricultural production process April-Dec
Soil fertility testing aid Before April
Aid for potato, fruit, vegetable storage facilities Before April
Pastoral complex construction May-June
Logistics upgrades May
National agricultural industry chain innovation model districts June-July
National comprehensive agricultural industrialized development (for new-type farms) June-July
Modern young farmer plan June-Aug
Model districts integrating production with cities (agricultural industry parks) July-Aug
Ministry of Agriculture Food Grain Processing Model Enterprises July-Sept
Fostering of New-type Professional Farmers July-Aug
National Agricultural Comprehensive Development Industry Integration for managed land, organic fertilizer, low-residue pesticides July-Oct
Aid for Outstanding Young Agricultural Technicians July-Oct
National Outstanding Rural Practical Personnel Aid (large farms, S&T model farms, returned migrants) Aug-Oct
Model Agricultural Comprehensive Development of Forestry (for tree-based oils, national forest reserves, forest economy) Aug-Jun2019
National Agricultural Comprehensive Development (for production and breeding of improved varieties of crops and livestock) Aug-Dec
Closed-System Ecological Agriculture Model (storage and processing of ag by-products, straw, manure) Aug-Dec
National Model Districts Combining Rice and Fish production Sept-Dec
Action Plan for Rural Migrants and Other Entrepreneurs Returning to Countryside (targeted tax and fee reductions, support for rural industry) by Dec 31
Agricultural Comprehensive Development Fund for High-Yielding Fields, Ecological Projects, Irrigation water conservancy by Mar2019
Modern Crop Seed Resource Protection, Crop Breeding, Variety Testing by Jan2019